Barclays' Libor Penalty Goes Beyond the Financial

Barclays’ reputation has hit a new low. The UK bank on June 27 received a 290 million pound fine from UK and U.S. regulators for trying to rig the London Interbank Offered Rate (Libor). The UK element is the biggest fine the Financial Services Authority has ever handed out.

The popular post-crunch perception of universal banks is that ordinary retail customers suffer from the fast and loose antics of traders in the investment bank. Over the course of an extraordinary 44-page document, the FSA largely stacks up that stereotype in Barclays’ case.

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To re-cap, Libor is the rate off which most retail and investment bank transactions, including $554 trillion of interest-rate derivatives, are priced. It is based on submissions by a host of lenders, and these are then crunched by Thomson Reuters. The FSA says Barclays, and potentially other banks, tried to manipulate the rate for the benefit of their trading desks.

The regulator has exposed a severe systems failure at Barclays Capital, the investment banking unit. Derivatives traders and those submitting Libor bids should have been divided by so-called Chinese walls. Instead, between 2005 and 2009, 14 traders submitted 257 requests to try to rig the rate in their favour. The FSA’s report shows they were brazen about it. One trader “begs” a submitter to put in a low Libor submission. The submitter responds: “I’ll see what I can do”. When hearing a submitter will be in late, another knowingly exclaims, “Who’s going to put my low fixings in?” And yet another pledges, “when I write a book about this business your name will be written in golden lights”. The submitter responds, “I would prefer this not (to) be in any book!”

Barclays Chief Executive Bob Diamond was in charge of Barclays Capital when these abuses took place. He was responsible for the culture. Unnamed senior executives are indirectly implicated by the FSA in the misleading Libor submissions. And no Chinese walls were put in until December 2009.

In Diamond’s favour, other banks are likely to be brought to book, and there is no evidence the attempted manipulation actually worked. He can blame wrongdoing on a small team at the bottom of his organisation.

But the fact that he and three top executives have pre-emptively waived their 2012 bonuses shows how seriously they are taking the ruling. There may still be further repercussions. And the affair weakens Diamond’s authority in arguing the firm’s case in the debate about future regulation. The full costs of the affair for Diamond and Barclays will be more than just financial.